Calculating Company Paid Health Insurance & The Affordable Care Act

The Affordable Care Act was enacted on March 23, 2010. It contains some tax provisions that are in effect and more that will be implemented during the next several years.

One of the requirements of the Affordable Care Act that will effect all business owners who provide employee health insurance, is that you now must report employer provided health coverage on Form W-2. Below is information copied directly from the IRS website.

The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2, Wage and Tax Statement, in Box 12, using Code DD. Many employers are eligible for transition relief for tax-year 2012 and beyond, until the IRS issues final guidance for this reporting requirement.

The amount reported does not affect tax liability, as the value of the employer excludible contribution to health coverage continues to be excludible from an employee’s income, and it is not taxable. This reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers.

Many companies who use QuickBooks usually pay the health insurance premium bill on a monthly basis in one lump sum, which is made up of a specific amount for each employee based on the type of plan or coverage that each employee has. Often times the health insurance payment is treated just like any other bill that the company receives and when handled in this manner, the amounts paid for each employee will not flow through to the W-2 automatically and these amounts will have to be entered manually when W-2’s are prepared.

Thankfully, the QuickBooks payroll module is very flexible and can be set up to automatically track the company paid portion of employee’s health insurance each time you run payroll. When these amounts are run through payroll they will automatically flow through onto any W-2’s that you process at the end of the year.

The formula for calculating the contribution rate is fairly straightforward if your health insurance policy renews each year on January 1:

monthly premium for the employee x 12 months divided by the number of pay periods in a year

However, if you are a contractor working on prevailing wage projects and take a “credit” against the full prevailing wage fringe rate because you pay some or all of the cost of your employee’s health insurance, the contribution rate MUST then be based on an hourly rate. The calculation then becomes:

monthly premium x 12 months divided by 2,080 hours

The formulas become more complex if your policy renews and the rates increase at any other time during the year.

To help you to get yourself organized, we’ve developed a free spreadsheet to help you calculate insurance costs, whether they are by pay period or an hourly value. Click the “Request our Excel-based Health Insurance Cost Calculator now!” button below.

NOTE: While this is a free download, we do ask that you submit your name and email address so that we can notify you if this checklist is updated in the future.

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